Divorce

Divorce and your Pension

Divorce can create financial difficulties. The pensions of both parties in a divorce may be considered when the court decides what money goes where. If one spouse never worked, while the other built up a large pension fund, this will have to be taken into account. The calculations can be complex.

Company pension schemes are usually valued at their 'transfer value' - the amount of money which would be transferred if the holder moved it to other company pension schemes. Private personal pensions are taken at their fund value. But valuing a pension fund is one thing - working out how to distribute it is quite another.

There are three ways of handling a divorce pension settlement, although since new rules came in in 2000, the third option - 'pension splitting' - has become the preferred option for many women. Here's how they all work:

Offset
Since you can't really split a pension down the middle, the court can decide to allow one partner to keep their pension and award the other partner a greater share of, for example, the family home, to 'offset' the value of the pension.

Earmarking
The court can also earmark one partner's pension. This means that when the pension finally pays out, in twenty years or so, part of the pension is reserved for the other partner. The problem with this system is that having divorced your husband or wife, you then have to sit around for years waiting for them to retire before you get any money. If they choose to retire late, you have to wait longer. And if they die before retirement, you can be left with nothing.

Pension splitting
In December 2000 the law on pensions splitting was changed. On divorce, a spouse can now be entitled to half of the main breadwinner's pension (whether it's the husband or wife). This applies to the tax-free lump sum as well. This means that one spouse can lay immediate claim to a percentage of their partner's pension pot and move the money to another fund. They will no longer have to wait for their partner to retire. This means that there can be a cleaner break in the divorce and it allows each partner more direct control over their finances. Pension schemes will have to make a cash transfer available so that the other spouse can start a new fund.

Remarrying
The Government brought in the pension splitting law to prevent the wife from losing out even if she remarries. Also, she is protected in the event of her husband dying and taking his pension rights with him before she draws her share of the pension, or of her husband deciding to delay taking his pension, making her wait too.